U.S. bill that aims to open financial system to cannabis companies could be bad news for Canada’s pot sector

Canada’s cannabis industry could see its first-mover advantage cut short if a piece of legislation that would open the U.S. banking sector to cannabis companies is eventually passed, some industry watchers say.

The Secure and Fair Enforcement (SAFE) Banking Act, which would protect U.S. banks working with cannabis companies from criminal scrutiny by regulators, is due to face a markup in front of the House Financial Services Committee on Tuesday, March 26.

That process, in which a congressional committee debates and amends proposed legislation before voting on the version of the bill that will be submitted to the House, is one of the final steps in a years-long campaign by marijuana activists to allow cannabis companies to gain full access to financial services — everything from bank accounts, to lines of credit, to credit cards.

The advantage that the Canadians have had is more access to cheap capital. That’s going to change overnight once this bill passes,

Mitch Baruchowitz, managing partner at Merida Capital Partners

If that happens, some argue that Canadian cannabis companies will face intense competition from their American counterparts, who would finally have access to major lines of financing, enabling them grow quickly and fully leverage domestic demand for cannabis.

“The advantage that the Canadians have had is more access to cheap capital. That’s going to change overnight once this bill passes,” said Mitch Baruchowitz, managing partner at Merida Capital Partners LLC, a private equity firm heavily invested in the cannabis sector.

“American multi-state operators like Acreage (Holdings Inc.) and Curaleaf are much bigger than most Canadian cannabis companies. I can’t see the appetite for U.S. banks to lend to most Canadian licensed producers over these multi-state operators. There’s so much capacity on the U.S. side, why would you lend to, say, a small licensed producer in Vancouver?” Baruchowitz said.

Currently, most major U.S. banks and credit unions do not offer banking services to cannabis companies or ancillary businesses related to the cannabis industry. Many dispensaries, for example, might not even have a bank account, even paying their employees in cash.

“Part of the reason Canadian companies have had a big advantage — even though they too struggled to get basic things like loans and credit cards in the first few years — is because of our capital markets. If now American companies get to accept their big loans, there’s a source of money for them to really grow,” said Ranjeev Dhillon, Partner at McCarthy Tetrault’s Cannabis Law Group.

“A lot of American companies spend so much of their time hunting for money, finding capital. That’s going to change really quickly if you can just get a large line of financing. So you’re going to see a lot more efficiency, and a lot more revenue,” Baruchowitz said.

Baruchowitz also believes that the passage of the bill will have particularly negative impact on U.S.-listed Canadian cannabis companies like Tilray who have touted their first-mover advantage in being able to access American public markets.

Many U.S. cannabis companies — albeit larger ones — have opted to list on the Canadian Securities Exchange (CSE) in order to gain access to the Canadian public markets. But the number of companies listed is substantially smaller than the total number of businesses involved directly or indirectly in the burgeoning American cannabis sector.

“Of course you can get loans from private investors. But in many cases, small businesses don’t have access to angel investors. Allowing banks to make these loans will help to address the equity issues that arise specifically with communities running businesses who don’t have access to powerful networks,” said Morgan Fox, spokesperson of the National Cannabis Industry Association, a lobbying group that has spent years rallying senators and congressmen on both sides of the political spectrum to support the SAFE Act.

Some banks like Wells Fargo & Co. however, have made it public that regardless of whether the SAFE Act passes in both the House and the Senate, they will continue denying financial services to marijuana companies until the plant is legal on a federal level.

“I think you might still see some of the larger banks not wanting to touch cannabis companies,” believes Dhillon.

As to whether or not the passage of the SAFE Act will have any impact on the Toronto Stock Exchange’s rule that cannabis companies cannot own U.S. assets as long as cannabis remains federally illegal south of the border, Dhillon is pessimistic.

“I think it’s important to separate the stock exchanges from the banks. I don’t think anything is going to change with TSX rules if U.S. banks can lend to U.S. cannabis companies. From the perspective of the exchanges, they are still not going to be comfortable until cannabis is fully legal,” Dhillon explained.

The bill has already garnered broad bipartisan support, with 138 co-sponsors from both parties.

Some Republicans on the House Financial Services Committee, however, are seeking to postpone the vote raising concerns that the bill is being rushed.

“We must ensure that Congress has done its due diligence, including conducting thorough oversight and review, before moving such legislation, said ranking member Representative Patrick McHenry of North Carolina and Representative Blaine Luetkemeyer of Missouri last Thursday.